Chapter 12 Flashcards
What does a downward shift in the aggregate demand curve mean?
reduced aggregate output, reduced GDP
Two cases when considering AD
- Prices vary, everything else fixed
- Prices fixed, other things vary
define
Wealth Effect
as prices increase, asset values fall, leading to decreased purchasing power, causing consumption to fall
define
Interest Rate Effect
an increase in price index leads to a decrease in money holding, savings fall, causing the interest rate to increase, downward shift of AE planned
What is the relationship between price index and GDP?
inverse!
list
Causes of AD shift
- changes in expectations
- changes in wealth
- size of existing stock of physical capital
- fiscal policy
- monetary policy
discuss
changes in expectations
ad
changes current consumption (inc), AD shifts up or down (pos or neg)
discuss
Changes in wealth
ad
all other prices fixed, asset prices increase, purchasing power increase (or can be opposite if wealth falls)
ad up
discuss
Size of existing stock blah blah
ad
building up lots of stock leads to a drop in investment
ad will fall (also works the opposite way)
discuss
Fiscal Policy
ad
government participation in economy
contractionary: dec AD, shift left
expansionary: inc AD, shift right
(can inc income through more transfers and tax reduction)
discuss
Monetary Policy
ad
can either be contractionary or expansionary
- bank can change lvl of interest in the ecnomy
- bank can change money supply in the economy
define
Aggregate Supply
relationship between the aggregate price lvl and the quanitiy of aggregate output producers area willing to supply
define
SRAS
short sun aggregate supply curve
no changes in tech, input prices don’t change, fixed (sticky) wages
define
LRAS
long run AS curve
tech improvement is possible, output and input prices are flexible, input prices can adjust to changes in the price index
Profit per unit of output equals..
output price - cost per unit of output
π = P - MC
describe
Graph of perfectly competitive firms
price takes
when price decreases, output decreases
U - shaped
descripe
graph of imperfectly competitive firms
price makers
if the price is cut, sales can be recovered
inc in per unit price lvl
effect on sras
SRAS shifts right
dec in per unit price lvl
effect on sras
SRAS shifts left
cost of production changes due to…
commodity/input prices
productivity/changes in regulations
describe
LRAS
- vertical
- a fall in aggregate price lvl will NOT effect GDP
- where LRAS hits the x-axis is potential output (Yp)
a rise in nominal wages…
shifts SRAS left
a fall in nominal wages… (SRAS)
shifts SRAS right
define
Demand Shock
when an event causes AD to shift
define
Positive Demand Shock
an event causing demand to increase, shifting AD to the right
ex. expansionary fiscal policy
define
Negative Demand Shock
policies and recession casuing emand to decrease, shifting AD to the left
define
Supply Shock
when an event causes SRAS to shift
define
Positive Supply Shock
supply increases, shifts right
ex. tech improvements, anything reducing production costs
define
Negative Supply Shock
supply decreases, shift left
changes inprices. dec in per unit profits
EQM when you put em all together
SRAS = AD = LRAS
define
Recessionary Gap
aggregate output < potential output
define
Inflationary Gap
aggregate output > potential output
define
output gap
(aggregate output - potential output) / potential output x 100
describe
What happens when demand shifts righ
Short run: eqm will shift to AD = SRAS
Yp < Y1, which means there’s more employment that usual (inflationary gap)
people will demand higher wages, causing SRAS to shift left as the production costs increase
Long run: output shifts back to the eqm and aggregate price lvl increases
describe
What happens when aggregate demand shifts left
short run: eqm will shift to AD = SRAS
Yp > Y1 (potential > output)
unemployment increases, causing production costs to decrease and SRAS to shift left
Long run: output shifts back to eqm, price levels decrease
the final shift is always done by….
SRAS!
if aggregate price level falls… (AEplanned)
AEplanned shifts up!
define
Nominal Wage
dollar amount of any given wage paid
define
Sticky Wages
nominal wages that are slow to fall even in the face of high unemployment, and slow to rise even in the face of labor shortages
define
Potential Output
the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible
